Thursday, June 3, 2010

Slashing Subsidies: Lessons from Mary Poppins

It is not easy to govern a country.

It is even less easy to deliver bad news to a restless population that has reduced the mandate to govern.

And so, when Najib delegated the extremely difficult task of driving the urgent matter of reviewing and forward-planning Malaysia's socio-economic future to Idris Jala, any Malaysian who bothered to turn his or her mind to the matter would have assumed that Najib had given the matter a lot of thought and, chose the best person available.

Idris, as Minister in the PM's Department in charge of the driving Pemandu, has done a sterling job so far.

He and his team has dissected, sliced, diced and reconstituted many knotty bottlenecks that has yielded fairly immediate results.

One of the more visible ones is the Crime Lab. We can see Najib's visible support for this in today's MSM report on his walkabout in SS2, Petaling Jaya. Of course, Hishamuddin and Koh Tsu Koon are in tow in the walkabout.

But, to be sure, it was Idris Jala's Crime Lab that zoomed in on the 50 crime hotspots in Peninsular Malaysia and, sorted the Police out on their unthinking policy on allocating manpower based on Police Districts rather than channelling more manpower to the 50 hotspots. This is why the crime rate has declined by 20% in 2010.

pix from here.

Hishamuddin and Tsu Koon can do the photo-ops. But, some of us know better. Lembu punya susu sapi punya nama!

That said, it appears that Idris Jala has recently been accused of being infected with the foot-in-the-mouth-disease (to continue the bovine analogy) when he was recently quoted as saying that Malaysia may become bankrupt by 2019.

His clarification is carried in full here. But, to be fair to the man, here is the salient part from the horse's mouth (to move from the bovine to the equine):

Why did you say that Malaysia will go bankrupt in 2019? Have you misled us?

During the Open Day, I presented some salient facts about the economy. For the last 10 years, we have been running a fiscal deficit which has been growing progressively from RM5 billion in 1998, to a record high of RM47 billion in 2009. This was due to the fact that government expenditure, including subsidies, has been escalating, whereas government revenue has not kept pace as our economy – the gross domestic product (GDP) grew at only 3% a year. Consequently, the government has to borrow a lot of money to cover for the shortfall. Our government debt in 1997 was RM90 billion and has grown at a rate of 12% a year to reach a record of RM362 billion in 2009.

In addition, as a proportion to GDP, Malaysia is one of the world’s highest subsidised countries with 4.7% of GDP compared to Indonesia 2.7% , Philippines 0.2% and Organisation for Economic Co-operation and Development (OECD) countries at 1.5% on average. (See first graphic below.)
To be clear, I said we could go bankrupt IF, and I repeat the word IF we continue with the same trends as in the past 10 over years; based on an annual increase of 12%, our debt will reach 100% of GDP in 2019 (a staggering RM1.158 trillion) and we could potentially go bankrupt then.

Together with escalating fiscal deficit exceeding 10%, we could end up in a similar economic situation like Greece and other similar countries. (See second and third graphics.)

All economists make assumptions and I did not say Malaysia will go bankrupt without qualifying it with certain assumptions. Theseare:

The economy/GDP continues at a rate of 3% a year;

Our deficit continues to balloon; and

Government debt continues to increase at rate of 12% a year;

Unfortunately, some of the reports about the bankruptcy projections did not state these assumptions and, therefore, can be taken out of context. These assumptions are used by us to make forecast about the future. In reality, as a country, we will have to do everything we can to prevent this from happening. The prime minister has laid out four strategic pillars which make up the country’s roadmap to achieving Vision 2020:

1 Malaysia, People First, Performance Now;

Government Transformation Programme;

New Economic Model; and

10th Malaysia Plan.

The future is clearly in our hands. And if all of us Malaysians work together, we can achieve Vision 2020. This involves concerted effort to grow our economy and be prudent in our spending.

In an effort to douse the spiralling flames of indignance arising from his "Greek tragedy", Idris met with some bloggers last night.

My takeaway from the generous 4-hour session between Idris and the bloggers is that the Malaysian Government sincerely wants to put some important economic course corrections. These course corrections will put Malaysia on a sound economic footing.

None of the bloggers were against the consumption subsidy principle.

The Mary Poppins lesson will come shortly.


walla said...


These are the challenges for the government sector to address in its moves to trigger higher value output from the private sector.

And it has less than ten years to do so.

Meanwhile there is an NGO movement going around. It is moving ahead of the NEM-10MP formulation to position itself strategically so as to have better bargaining power with the government vis-a-vis retention of status quo.

There are some nettlesome points.

One, the dilemma might have been a fact but its solution has been a fiction the size of the financial abyss that is the stark reality before us.

Two, forty percent of the government's revenue comes from oil. No new oilfields within sovereign waters have been announced. Ergo, the government will have to depend on Petronas striking deals with other oil-rich countries. Unless some oil-strikes are already in place, the prospects are only so-so. If not, why the whole rigmarolly exercise?

Three, the government has not delivered a single record of financial prudence. A short stretch of highway has a three hundred percent price overrun. Tolls whose rates should have been diminished permanently by twenty percent by now are still collected at blasting rates with the specter of another increase. The Auditor-General's report has been a nightmare of leakages and siphoning galore, and those are just the ones caught in its radar by its small-staffed teams. The public sector remuneration bill is ballooning even as its levels will soon not be even adequate for the livelihood of the public servants. Meanwhile money is thrown into all manners of projects whose returns are suspect. Take F1. Take the annual billion for KLIA. In fact take any damn project that one can recall. Any. All. Which can be said to be a model of financial prudence and eclectic success?

So, if there is going to be a trillion ringgit debt in nine years time, what is there to bargain about now? If the assumptions turn true, the government will be in a corner where it cannot even afford to pay salaries let alone run services. Under such a circumstance, it would be foolhardy to load the private sector because if it falls, the country falls.

A high sovereign debt debilitates everything. We may have some savings. Subject to the absence of a distortive W-shape from the Eurozone, our recent ten percent quarterly growth may be signaling a recovery - but - do.we.have.fundamentals.on.hand in the first place to be confident enough to negate the arrival of such a high sovereign debt that will cause financing costs to spin all into a vicious cycle, so that all future effort will be just to pay the interest charges and not the principal sums of a loan? If our ratings fall, things will cost more because sellers will insert a risk cost into the prices and buyers will see opportunity to press for discounts. Our foundation for competitiveness will then erode before it can even be laid.


This post, for that little baby in the crib just now, such a cherubic innocent smile. Whither its future?



Subsidies removed, government restructured, industry and business supported to the zenith, globalization assimilated completely, brain-cultivation the primary target, procurements rationalized completely, market completely opened up, and bloggers given fiscal incentives to carry on.



We are in this dilemma because things that should have been done long ago weren't and things that must not be done were and people whose mindsets should have been recultivated weren't and those who should have been supported more didn't get the support and denials which should have been nipped weren't and.....

The end.

walla said...


So we have cunningly reduced everything away from the rakyat and private sector, and towards the government sector.

Which is immediately presented with two options: reduce fat and/or increase income-generating activities.

If we look at the performance of one of its major holdings, that going by the name of Sime, we will have to be reticent with our confidence the others in the same stable will be doing spectacularly better. If it can bleed in oil even while having plantations, what will the other holdings in infrastructure, gaming and so forth be capable of?

And since the government is the biggest employer in the country without whom the economy may nosedive further if its employees as customers of the private sector be out of jobs, the same problem will have to be retained.

The only way around this continuing confusion is to reengineer and transform both.

Given that Cuepacs have just said forty one percent are suspect of being on the take, that will take some doing. Given that the government have had to borrow an executive from a petroleum company to shape-charge its transformation program, the other aspect about re-enginnering government-held semi-private management will also present insuperable challenges.

After fifty three years of nation-building, we find ourselves without adequate quality management for critical positions across the land while the country remains mired in a financial situation whose alarm bell has been sounded so loudly it would probably explain the twenty percent drop in crime rate.

Except that a certain group of MPs have thicker tympanic membranes. They are adamant the government will not be bankrupt.

If that be the case, why the need for the four strategic pillars then, one asks timidly?

Why the need for labs, even?

That crux mentioned above points to the matter of competitiveness. We are said to have risen by eight notches to be last year's tenth most competitive nation. But how can that be when we are one of the most subsidized economies on earth? One therefore suspects if we remove the subsidy element from the Swiss equation, the ranking will fall. Would the same group of MPs be then saying the same thing?


It takes years to become an innovative economy. First, first-class brains are needed extensively. Second, the environment in which they thrive must already be present and thriving. Third, the soft factor of policies and how farsighted, pro-industry and globally-encompassing their implementation has taken root must be routinely actuated without the slightest shred of counter-productive moves that will cause a fall in confidence. Fourth, the governmental, business and physical ecosystem must be clean, green and efficient. And fifthly, there must already exist a globally-tested genius factor in the market. In other words, killer applications and blue-ocean products already well-accepted and earning good dough from the rest of the world.

walla said...

Unfortunately for Idris Jala, sugar might be one of the subsidies to be removed so he can't be the Mary Poppins with her spoonful of sugar to help the medicine go down.


Idris is just the messenger and deliverer of bad tidings not of his doing.

In the first place, he must have had nerves of steel and a sense of corporate nationalism to have accepted the MAS job when he could have been cushier living on his reputation at Shell, knowing full well that the only way to improve the airline's bottomline was to liquidate some assets in order to sweeten the outlook to shore investor confidence and so save the rating for future financing without having to depend on government support which would not have been forthcoming under present circumstances.

And other airlines have floundered in the maelstrom of the roller-coaster rides of fuel prices. Thus, hard lesson learned notwithstanding, no one should be expected to score perfect hits on fuel hedging in the first round.

After all, if someone can, he would only need to do it once and be set for life, considering aviation fuel contributes thirty percent to the cost of running an airline.

Since it is a notable fact that decision-makers and eminences read this blog, one should therefore add more confusion in order to supersaturate the matter and thus crystallize the situation.

So it remains to say what one should be concerned going forward are these points:

one, the assumptions qualifying the assertion of bankruptcy are doable. Cough:

the economy can achieve three percent year-on-year;

the deficit will continue to balloon, and,

government debt will continue to rise at twelve percent a year.

Why do we say these assumptions are achievable?

The whole purpose of the exercise is to remove subsidies. Once subsidies are removed, cost of living will rise about forty percent by the incantation of sticky price multipliers.

This negative effect will only be nullified if the people can live on less or make more to cover the loss. If they have to live on less, the government will have to be very brave to continue maintaining the same tax rate. If the government reduces tax, it will reduce its own revenue, not that this government having lots of money has been entirely without grievances to the people.

And if the people make more, why haven't they by now?

So they can't make more or live on less. Both motivation and ability will be missing, and more importantly - simultaneously. That's the real crux of the matter. If one were to precede the other, there's elbow room to nudge the problems one way or the other. But since both stand side by side, they magnify each other instead.

In the words of Voltaire's Candide's Dr Pangloss, we are exactly where we are in this best of all possible worlds.

Continuing the confusion, the government may decide not to remove subsidies because it calculates that the savings from removing the subsidies cannot be parlayed fast enough by new taxable income from a workforce that will be down and out completely. And that's not because we are not in the Caribbeans.

Therefore and unless new revenue comes its way quickly, its deficit will balloon and its debt will continue at the current rate.